Option Activity Alert: VALE, BID, EBAY, YGE

VALE – Vale S.A. – Shares in the Brazilian iron ore producer increased as much as 0.82% thus far in the session to secure an intraday high of $35.60, but a massive three-legged options combination play in the May contract suggests one big player is prepared to see the stock pull back ahead of expiration. The investor appears to have sold in- and out-of-the-money calls in order to purchase a large number of put options on the stock. The transaction may be tied to the large blocks of Vale stock that sold around the same time the options were traded. It looks like the strategist sold 11,500 in-the-money calls at the May $35 strike for an average premium of $2.29 each, and sold another batch of 11,500 calls at the higher May $40 strike at an average premium of $0.56 apiece in order to buy 23,000 puts at the May $30 strike for premium of $0.61 a-pop. The trader pockets a hefty net credit of $2.24 per contract on the spread, and keeps the full amount if shares in Vale fail to trade above $35.00, and the now in-the-money call options ultimately expire worthless at expiration. Additional profits start to amass on the long position in put options should the stock shift sharply lower in the next couple of months. The strategy may have been implemented as a way of hedging an enormous long position in the stock, but could also be an outright bearish call on the iron producer. If the latter is the case, the trader is exposed to potentially devastating losses in the event that shares fly higher ahead of April expiration. The short calls obligate the investor to deliver 1.15 million shares at $35.00 each, and 1.15 million at $40.00 each, if the calls land in-the-money by expiration in April. The net credit received on the transaction provides the trader with an effective buffer against losses for limited fluctuations in the price of the underlying. The three legs of the transaction represent fresh positioning in Vale’s options given small levels of previously existing open interest at each strike described.

BID – Sotheby’s Holdings Inc. – One options player pocketed big profits on a well-timed bullish bet in Sotheby’s calls this morning. The auctioneers’ shares are currently up 0.2% at $48.34 as of 11:30am in New York, but hit a 6-month high of $49.03 yesterday, driving the stock’s run up to 86.4% since August 31, 2010. The gavel-bearer populating Sotheby’s today initiated a bullish bet back on January 25, 2011, when shares in the name encountered a bump in rally-road and slipped to a three-month low of $38.23. On that day, the trader appears to have purchased 1,060 deep out-of-the-money calls for an average premium of $1.33 apiece at the April $45 strike. In less than one month’s time since the calls were purchased, shares in Sotheby’s jumped more than 28.0% to trade as high as $49.03. The sharp rally in the price of the underlying pales, however, in comparison to the value of the now deep in-the-money calls. The investor sold the calls today for a premium of $5.45 a-pop, pocketing net profits of $4.12 per contract, or gains of around 310%. Further, it looks like this trader plans to stick around the auction house for the time being. The investor doubled his bullish stake in Sotheby’s, buying up 2,120 calls up at the April $55 strike for an average premium of $1.35 apiece. Shares in the auctioneer must rally another 16.6% in the next couple of months in order for the investor to breakeven on the position at an average price of $56.35 by April expiration day.

EBAY – eBay, Inc. – The operator of online marketplaces popped up on our scanners this morning after large blocks of April contract call options changed hands on the stock. Shares in eBay shot up 2.6% to $35.35 at the start of the session to trade at their highest point since November 2007. The investor responsible for the call activity appears to be rolling a sizable long call position up to a higher strike price, taking profits on the initial bullish stance, and extending optimism on EBAY going forward. It looks like the trader originally picked up 8,800 calls at the April $34 strike for a premium of $0.33 apiece back on January 31, 2011, when shares were trading around $30.13. In the past few weeks, the stock has come up 17.3%, creating favorable circumstances for the call buyer. The trader sold the 8,800 now in-the-money calls for a premium of $2.23 each today to collect net profits of around $1.90 per contract. Next, the trader extended bullish sentiment on EBAY by purchasing 8,800 fresh calls up at the April $40 strike for a premium of $0.22 per contract. The investor starts to make money on the new position should the price of the underlying jump 13.8% in the next couple of months to exceed the breakeven price of $40.22 by April expiration day.

YGE – Yingli Green Energy Holdings – Bearish positions in Yingli Green Energy put options are building ahead of the firm’s fourth-quarter earnings report, which is slated for release on Friday morning before the market opens. Shares in the name traded as low as $12.85 this morning, but pared earlier losses to stand just 0.15% lower on the session at $12.96 just before 12:00pm in New York. Investors positioning for shares to slide picked up approximately 5,000 in-the-money puts at the February $13 strike for an average premium of $0.45 each. Put buyers at this strike are poised to profit should shares in the renewable energy products maker slip 3.2% from the current price of $12.96 to breach the average breakeven point to the downside at $12.55 by the time the contracts expire tomorrow. Options implied volatility in Yingli is up 4.8% at 52.49% in early afternoon trade.

Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.

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